Looking through Nintendos financial papers you can find a lot of interesting data, so I thought that it would be good to analyze what we have.

There are even more things you can break down than I did here, maybe I'll add them in a post later, feel free to contribute your own thoughts to the graphs & data.

It does not include the last two quarters of this financial year.

Since we don't have hardware margins and software margins, I'm concentrating on the revenue-part (information that we have) and trying to analyze their profitability with the gross profit ratio in the end.

1. A historical overview

First of all, I'll start with a big historical overview of Nintendos overall business.

Net Sales"In bookkeeping, accounting, and finance, Net sales are operating revenues earned by a company for selling its products or rendering its services.
Also referred to as revenue, they are reported directly on the income statement as Sales or Net sales."

Gross Profit"In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service, before deducting
overhead, payroll, taxation, and interest payments."

Operating Income"In accounting and finance, earnings before interest and taxes (EBIT), is a measure of a firm's profit that excludes interest and income tax expenses."

Net Income"In business, net income - also referred to as the bottom line, net profit, or net earnings - is an entity's income minus cost of goods sold, expenses and taxes for an accounting period.
It is computed as the residual of all revenues and gains over all expenses and losses for the period,"

I think this chart is well known, Nintendo always generated money (aside from FY3 2012), as well as the big Wii & NDS - spike and downfall.

2. Revenue breakdown

As you can see, the net sales graph is Nintendos revenue generated by their products.

Going deeper into their files you can find a breakdown of their revenues.
Unfortunately, Nintendo started with the breakdowns with FY3 2001, so we don't have
data prior to this, but here's the current chart:

You have to consider that Wii & NDS have combined software sales of 1.802.750.000 units.

Considering this, you can say that people saying that Nintendo should abandon their hardware is quite a crazy idea, because it makes up to 60% of their business.

Furthermore, their hardware gives them a base for their own software sales, for accessory-sales, royalties and the possibility for their own online infrastructure (I'll come back to the online infrastructure later).

Nintendo managed to ship around 700.000.000 of it's own software titles during their Wii & NDS - age and still didn't manage to generate higher revenues than their hardware,
of course, Wii & NDS had great hardware sales, but unlike the first year in the chart, hardware beats software everytime.

From a financial point, one crucial thing for Nintendo is that they sell their hardware beneath the production price,
one problem that occured with the 3DS (resolved by now) and the Wii U (still sold under price) and one of the
big reasons why they generate operating losses in the last few quarters.

People saying that Wii U should be 200 $ or less is wishful thinking and not really an option considering this. It's their fault though, because they should've planned this better (and other things like marketing, etc.),
but ok, this is quite an unpredictable market if you want to predict long term sales.

3. Hardware revenue breakdown

So, let's analyze the hardware revenues even further:

There's a section in the report called "Other", I suppose these are accessories and maybe other things I can't think of now.

It's quite unfortunate that we don't have older reports, but you could say that Nintendos hardware business during the GCN-days
was mostly driven by the handheld-division, hence, even the "Other-section" generated more revenue than the GCN.

The Wii is somewhat of an anomaly, it even managed to outpace the NDS in two years, thanks to the high sales and higher price-point.

It would've been quite interesting to see the breakdown for the NES-, SNES- and N64-generation, in comparison to the Game Boy and Game Boy Color.

4. Software revenue breakdown

Now, lets move on to the software:

It's quite similar to the hardware graph, but one thing got me interested.

There's a section in the reports that's called "Content income", looking through older reports, it was declared as "royalties & content income", I think it's still the same.
So I believe these are the 3rd Party licencing fees that Nintendo earns. If you have further information what this could be, please elaborate.

Most surprisingly for me is the fact that Nintendo generates like 10 to 100 times more revenues with their own software than with 3rd Party royalties (Content income).
The 3rd Party sales on the Wii & NDS havn't been bad at all (considering the overall mass).

One of Nintendos secrets of their success (over 36 years in the gaming market and only one year with net loss) is the well known fact that
they sell their hardware for more than the production price. (3DS & Wii U being the exception).
Furthermore, their software margins are extremely high because they don't have to pay royalties and don't have to share the price between developer & publisher.

I already mentioned what the gross profit is:

Gross Profit"In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service, before deducting
overhead, payroll, taxation, and interest payments."

The gross profit ratio gives us a clue about Nintendos profitability in terms of direct production costs compared to their revenue:

The graph shows us that Nintendo always worked around a gross profit ratio of 40%. One of the reasons why Nintendo
earned money during the GCN-days, while Sony made loss, despite PS2 being the best selling home system to date.

Now, if you look at this, gross profit ratio always declined a bit with the release of new hardware, which is logical, because they're selling it
at a price near to the production price, higher sales give them lower production costs and better margins, so they increase again until the next hardware release.

But there's one anomaly if you look at the end and these are 3DS & Wii U. It's well known that both products didn't follow the "selling price > production price" route. While they resolved this problem with the 3DS, the Wii U is still being sold at loss.

This is currently Nintendos biggest problem in terms of profitability and one reason why Nintendo won't cut the Wii U - price by a big amount (I suppose).

6. Plans to enhance the profitability again

So, you have to consider that Nintendo has low-margin-hardware & higher production costs for their software thanks to the HD-age. And their research & development expenses are also steadily increasing.

What can they do or what will they do?

Because of this problem, Iwata took some actions to increase the profitability again, but these are more or less mid- to long-term things:

• You probably know that Nintendo builds a new R&D-building next to their Kyoto-headquarters. The construction of the facility costs about 200.000.000 $ (this is also something that disturbed
their profitability in the last years) and it should be finished by now or in the next few months.
The new facility can host more than 1.500 employees and it's probably used to enhance their software development and overall efficiency.

• And they also started to unify their development divisions, quoting Iwata:

"As you might already know from some newspaper reports, we will reorganize our development divisions next month for the first time in nine years. Two divisions which have independently
developed handheld devices and home consoles will be united to form the Integrated Research & Development Division, which will be headed by Genyo Takeda, Senior Managing Director.

Last year we also started a project to integrate the architecture for our future platforms. What we mean by integrating platforms is not integrating handhelds devices and home consoles to make
only one machine. What we are aiming at is to integrate the architecture to form a common basis for software development so that we can make software assets more transferrable,
and operating systems and their build-in applications more portable, regardless of form factor or performance of each platform. They will also work to avoid software lineup shortages
or software development delays which tend to happen just after the launch of new hardware. Some time ago it was technologically impossible to have the same architecture for handheld
devices and home consoles and what we did was therefore reasonable. Although it has not been
long since we began to integrate the architecture and this will have no short-term result, we believe that it will provide a great benefit to our platform business in the long run."

• Reducing Wii Us production costs (they plan this, but I have no idea how, maybe better contracts)

• Driving the online business

7. Online business

Nintendos online business saw a big growth in the last quarters/years:

For reals, this was a good read. I'm not very informed on the subject, but I've always thought the indie push is NOA's strategy to bolster the Wii U library. To my knowledge, the program that offers loaner Wii U dev kits is exclusive to Westerners and not available in Japan. No plans to bring Unity to 3DS that I'm aware of either.

Excellent read thanks for the enormous effort! I remember reading about the hardware profitability a long time ago, but it still amazes me. It's also good to see them slowly understanding the importance of online (wishful thinking or no), it's the only way they can remain this profitable in the HD age imo. Let's just hope they incentivize it by, you know, actually offering good deals.

Kudos, this is an excellent thread and should be required reading for anyone suggesting that Nintendo should go third-party or even cross-platform. That said, it also illustrates just how unprecedented their current situation is; things are really not good at the moment. Not much they can do but stick to their guns.

I wonder when the Wii U will become profitable again, or if it already is? (I think they last mentioned it wasn't in the summer? Am I wrong?)

This thread needs to be referenced when people mention the "obvious" choice of going third party.

From their last investor meeting (October 2013):

"The gross profit ratio of 31.6% was produced by a number of positive and negative factors. Although software, which has a relatively high margin,constituted a higher ratio of the total sales and the profitability of the “Nintendo 3DS” hardware improved, these factors were outweighed by
the effects of the production costs of the “Wii U” hardware remaining higher than its selling price and the price reduction of the “Wii U” hardware in the overseas markets."

A lot of info here I didn't know, despite following Nintendo religiously. Great OP, superb.

Three biggest things for me:
1. How much profit they typically make on their hardware. Doesn't make any sense to me whatsoever. EDIT: Sorry, that was a revenue graph. If they're not making much profit on their hardware then that revenue isn't that important, if they are, then it is.
2. How low the royalty income is compared to their first party income. Royalty income is great (it's free money!), but they could certainly survive without it.
3. How the gross profit ratio shows that some of the 'nintendoom' culture at the moment is justified - for the first time ever Nintendo's core business has fallen far short of their typical GPR. That needs to turn around quickly.

It's much harder to make profit on hardware in today's world where android tablets are being sold for 150 euro. I fear that a huge section of that revenue is going to be lost to Nintendo in the near future. However, seeing how much revenue hardware has brought in in the past, I understand why they won't ditch it.

Considering how much money historically they have made off hardware it amazes me that the Wii U got the green-light. They have produced a console with an expensive accessory which has really put them in a jam when it comes to pricing.

Going third party really isnt an option. Not one which will make the company stronger anyway.

Their hardware margin is unsustainable on consoles and is the reason why they will have to alter their business model or go third party in that segment - if Sony and MS continue to razor then it is game over on that front with Nintendo relying on Wii like fads.

From NES to N64 they could lap up fat margins and life was cosy. Loss in marketshare wasn't an issue since they didn't need to chase scale to be profitable. Similar but less profitable situation with GC and then a return to the old times with Wii.

However with hardware competition between Sony and MS being a necessity to keep the core and traditional market Wii U falls flat on its face. They need scale with Wii U, they can't afford to lose the scale game since their margins are now normalised on hardware.

The issue for them is that is how this segment will evolve for the foreseeable future. They can no longer sell cheap hardware with a fat margin. The old times are over. As a company I don't think they even have the capability to react to this. So they will try and capture lightning in a bottle again like they did with Wii and so their cash burn begins in earnest.

Dat Gross profit. Hardware making up 60% of their revenue is insane. Going third party would kill them and lead to so many layoffs.

I see this all the time, and don't understand it.

Surely their hardware team is less than 10% of their overall staff? I'd say it's less than 5%, but I'm guessing, and would love to see figures.

They have about 30 different dev houses, plus marketing and executive positions, customer service etc... I just don't see their hardware team being that big.

And it doesn't matter if you lose 60% of your revenue if you make no profit on that revenue but are making all of your profit on the other 40%. Obviously Nintendo can still get back to a position where they are making money on hardware, but I think software accounted for 75%+ of their profit even in the Wii / DS days.

Surely their hardware team is less than 10% of their overall staff? I'd say it's less than 5%, but I'm guessing, and would love to see figures.

They have about 30 different dev houses, plus marketing and executive positions, customer service etc... I just don't see their hardware team being that big.

And it doesn't matter if you lose 60% of your revenue if you make no profit on that revenue but are making all of your profit on the other 40%. Obviously Nintendo can still get back to a position where they are making money on hardware, but I think software accounted for 75%+ of their profit even in the Wii / DS days.

If you lose 60% of your income it doesnt matter that 10% of your people were making that 60%, the other 90% of your people are going to suffer no matter what.

If you lose your biggest player, the team is going to suffer even if you get a new guy.

Good, but I think the focus on revenue is unfortunate. As already pointed out, that's irrelevant, given that they're drowning there. And while it is simplistic to say that they should simply become a pure software company, it's equally simplistic to say "but look at the hardware business!" in response. Rather, you should make an argument that they can't be a profitable company with a long future without hardware -- that's a different challenge for you, since Nintendo without being saddled with hardware development, network infrastructure, and all the support that it entails might well be a company more able to succeed in this new world of software and services.

By focusing on annual reports, you're missing some details. One of them is that 1Q and 2Q this year both had the same amount of digital revenue -- that was not true last year. For a company whose hardware base continued to expand, and whose digital software offerings continued to expand, it strikes me as unusual for digital software revenue to be flat from 1Q to 2Q.

Not in the moment, and likely not in the future either. The market is simply too competitive to profit off of hardware anymore.

Except the 3DS is profitable, right NOW, and IIRC Sony expects the PS4 to hit the even mark if not profitable soon as well right? Your statement is just flat out false.

I think its time to just admit that the logic behind the "Make their games for smartphones" nonsense is... well.... nonsense, and not based in, or on any form of arithmetic at all. Just a bunch of people shouting random stuff about today's latest craze. I think most people knew it wasn't that simple anyway, but its interesting to look at the numbers and see just how hilarious it is. With the way people have been going on, you would expect it to be a no brainer. However when you look close enough, you find yourself having to make some serious leaps of logic and concessions just to make the idea of going mobile only competitive.

If you lose 60% of your income it doesnt matter that 10% of your people were making that 60%, the other 90% of your people are going to suffer no matter what.

If you lose your biggest player, the team is going to suffer even if you get a new guy.

But this post makes no sense - if the hardware group is only making revenue and not profit, then it's not their biggest player despite the fact that it puts up the biggest revenue. It may be a damn-near irrelevant player. Of course it's not - since it allows them to get that royalty revenue and to sell their software without royalty fees etc. But it's not the major player.

Good, but I think the focus on revenue is unfortunate. As already pointed out, that's irrelevant, given that they're drowning there. And while it is simplistic to say that they should simply become a pure software company, it's equally simplistic to say "but look at the hardware business!" in response. Rather, you should make an argument that they can't be a profitable company with a long future without hardware -- that's a different challenge for you, since Nintendo without being saddled with hardware development, network infrastructure, and all the support that it entails might well be a company more able to succeed in this new world of software and services.

Didn't think you'd be on the "Nintendo needs to go third party" bandwagon, jvm. ;)

Good, but I think the focus on revenue is unfortunate. As already pointed out, that's irrelevant, given that they're drowning there. And while it is simplistic to say that they should simply become a pure software company, it's equally simplistic to say "but look at the hardware business!" in response. Rather, you should make an argument that they can't be a profitable company with a long future without hardware -- that's a different challenge for you, since Nintendo without being saddled with hardware development, network infrastructure, and all the support that it entails might well be a company more able to succeed in this new world of software and services.

By focusing on annual reports, you're missing some details. One of them is that 1Q and 2Q this year both had the same amount of digital revenue -- that was not true last year. For a company whose hardware base continued to expand, and whose digital software offerings continued to expand, it strikes me as unusual for digital software revenue to be flat from 1Q to 2Q.

Agreed, but this was still a nice write up. Also that 3rd party royalty chart is staggering. Nintendo is losing out on so much money from not having 3rd party support I don't understand people who don't see the need for Nintendo be aggressive there.

In this thread: people talk about how important Nintendo's hardware revenue is without understanding the difference between "revenue" and "profit".

Revenue is cost-agnostic. As in, if you sell a Wii-U for $300 it generates $300 in revenue. The fact their hardware revenue is huge doesn't actually mean their hardware sector is profitable at all, it just means that making and selling video game systems is expensive. (I know, breaking news, more film at 11.)

Good, but I think the focus on revenue is unfortunate. As already pointed out, that's irrelevant, given that they're drowning there. And while it is simplistic to say that they should simply become a pure software company, it's equally simplistic to say "but look at the hardware business!" in response.

I thought I got this wrapped up in the gross profit part. ;)

They usually sell their hardware with income, 3DS & Wii U are not following this route.

You can make your own calculations how much money they earn with hardware (usually) and how much this is when they sell 10.000.000 to 20.000.000 of hardware units.

Furthermore, their financial reports don't give me any hardware margins of course, that's why I can only argue with the overall gross profit, which also includes the software.

Originally Posted by jvm

Rather, you should make an argument that they can't be a profitable company with a long future without hardware -- that's a different challenge for you, since Nintendo without being saddled with hardware development, network infrastructure, and all the support that it entails might well be a company more able to succeed in this new world of software and services.

I didn't want to write an essay since the OP is already quite big.

But I mentioned this, maybe it was too short:

"Furthermore, their hardware gives them a base for their own software sales, for accessory-sales, royalties and the possibility for their own online infrastructure (I'll come back to the online infrastructure later)."

Originally Posted by jvm

By focusing on annual reports, you're missing some details. One of them is that 1Q and 2Q this year both had the same amount of digital revenue -- that was not true last year. For a company whose hardware base continued to expand, and whose digital software offerings continued to expand, it strikes me as unusual for digital software revenue to be flat from 1Q to 2Q.

Well, it always depends on their output, this is quite a short-term comparison you're making, I don't see this being that much of a problem if they almost generated 70% in the first half of this fiscal year compared to last year.

Originally Posted by Imperfected

In this thread: people talk about how important Nintendo's hardware revenue is without understanding the difference between "revenue" and "profit".

Revenue is cost-agnostic. As in, if you sell a Wii-U for $300 it generates $300 in revenue. The fact their hardware revenue is huge doesn't actually mean their hardware sector is profitable at all, it just means that making and selling video game systems is expensive. (I know, breaking news, more film at 11.)

In this thread: People don't read that Nintendo always made profit with their hardware.

3) Nintendo new division will increase their costs significantly, but they will improve their capacity of creating more games and doing it cheaply.

4) The person or group of people who envisioned Wii U is or are responsible for Nintendo operating loss and bad position in the industry. As I said, one bad decision is enough to completely destroy a company legacy. We don't know Iwata fault, but he should have known better.

5) Wii U small design and tablet controller destroyed Nintendo's chance of been profitable. If they had choosed a much improved system with better graphics and an improved Wii Mote, they could have followed their normal business practice of a hardware profit increasing over the years without creating some new crazy and questionable gimmick (some of this topic is not fact, but my toughts).

6) They can't abandon 3ds. It's their best shot of becoming profitable again and pray that MK 8 and their new games will create a better momentum.

7) Nintendo never really cared about 3rd parties. They improve Nintendo's net income but they are just marginal. Iwata never really cared about thirds. Iwata doesn't know how to improve Nintendo's profit with thirds.

8) Nintendo's Online is proving much more profitable and consumers adoption is much more faster than they tought. Actually, if you think about it, They don't need to improve the number of sales. Nintendo care about profit. If they can achieve the same profit but selling less, that's ok for them. In the end, even if Mario 3d world is selling worse than Mario Sunshine, the difference in profit may not be that distant.

9) Iwata may have a chance to lead Nintendo in 2014. It's bad but not terminal. The improvement in 3ds profit may save his position. The charts shows that the third year is the best year in profitability. If 3ds and 2ds is generating great gorss profit, it can justify the decreased price of Wii U. Maybe, for every two 2ds sold, they justify the Wii U for 300 dollars.

10) I expect Nintendo to invest more and more on the eshop.

11) I don't see Nintendo creating software for IOS or Android. It doesn't make any sense. The money is on hardware. They will need to create something on mobile to make people interested in their hardware.

Considering how much money historically they have made off hardware it amazes me that the Wii U got the green-light. They have produced a console with an expensive accessory which has really put them in a jam when it comes to pricing.

Going third party really isnt an option. Not one which will make the company stronger anyway.

Which is why I continually suggest they halt production of the gamepad and sell it as a peripheral to a profitable base SKU. It would hurt at first, since all the money sunk in R&D on it would be in vain, but it would stop the "doomed" speculation.

Agreed, but this was still a nice write up. Also that 3rd party royalty chart is staggering. Nintendo is losing out on so much money from not having 3rd party support I don't understand people who don't see the need for Nintendo be aggressive there.

The 3DS and the Wii sold a massive amount of 3rd party games though. Not as much as they could have with better support but still a substantial amount. If anything this indicates that the licensing fees are not as high as one might have expected

13) even though this charts are about revenue, it is pretty clear that everytime a system is launched, in the 3 following years, their gross profit increase a lot. It means the hardware is really important for the profit margin. If the software is 90% of their gross profit, they would have abandoned hardware production a long time ago because it wouldn't change gross profit. Besides, the following years of console launch wouldn't make any difference in gross profit, or the last years of a system. Look how the graphs grow and declines accordingly with hardware cycles.

The 3DS and the Wii sold a massive amount of 3rd party games though. Not as much as they could have with better support but still a substantial amount. If anything this indicates that the licensing fees are not as high as one might have expected

That's one thing I concluded.

I actually tried to figure this out by subtracting their own software sales from the chart at got something like 2 $ to 5 $ per game.